FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number 0-18902
Health Risk Management, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1407404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
8000 West 78th Street, Minneapolis, Minnesota 55439
(Address of principal executive offices, Zip Code)
(612) 829-3500
(Registrant's telephone number, including area code)
-------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of Common Stock, par value $.01 per share, outstanding
on November 4, 1996 was 4,222,226.
<PAGE>
HEALTH RISK MANAGEMENT, INC.
INDEX
Part I. Financial Information Page Number
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--at September 30, 1996 and
June 30, 1996..................................................3
Consolidated Statements of Operations for the three
months ended September 30, 1996 and 1995.......................4
Consolidated Statements of Cash Flows for the three
months ended September 30, 1996 and 1995.......................5
Notes to Consolidated Financial Statements......................6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation ................8-10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.......................11
Signatures...............................................................12
Exhibit Index............................................................13
Exhibit 11...............................................................14
2
<PAGE>
PART I. FINANCIAL INFORMATION
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
September 30,
1996 June 30,
(Unaudited) 1996
--------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,518 $ 3,347
Accounts receivable-net of allowance for doubtful accounts of $210
and $200 at September 30, 1996 and June 30, 1996, respectively 4,105 5,134
Unbilled receivables 5,448 4,642
Deferred income taxes 235 235
Other 1,664 1,394
--------------- --------------
Total current assets 13,970 14,752
Computer software costs, net of amortization of $10,747 and $9,816 at
September 30, 1996, and June 30, 1996, respectively 17,689 17,132
Property and equipment less accumulated depreciation of $9,126
and $9,272 at September 30, 1996, and June 30, 1996, respectively 8,693 9,788
Contract rights, net of amortization of $786 and $748 at
September 30, 1996 and June 30, 1996, respectively 992 1,030
Other assets 2,275 2,120
--------------- --------------
$ 43,619 $ 44,822
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,356 $ 1,863
Accrued expenses 1,996 2,638
Unearned revenues 3,107 2,578
Current maturities of notes payable 1,069 1,076
Current portion of capitalized equipment leases 970 1,351
--------------- --------------
Total current liabilities 8,498 9,506
Deferred income taxes 2,570 2,292
Long-term portion of notes payable 1,892 2,152
Long-term portion of capitalized equipment leases 1,470 2,398
Commitments
Shareholders' equity:
Undesignated shares, $.01 par value, 9,750,000 authorized, none issued
Common shares, $.01 par value, 20,000,000 shares authorized,
4,218,476 and 4,180,476 shares issued and outstanding at
September 30, 1996 and June 30, 1996, respectively 42 42
Additional paid-in capital 27,896 27,619
Retained earnings 1,251 813
--------------- --------------
Total shareholders' equity 29,189 28,474
--------------- --------------
$ 43,619 $ 44,822
=============== ==============
</TABLE>
3
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Revenues $ 14,395 $ 13,371
-------------- -------------
Operating expenses:
Cost of services 8,648 7,880
Depreciation and amortization, principally cost of services 1,726 1,579
Selling and marketing 1,908 1,558
Administration 1,291 1,358
-------------- -------------
Total operating expenses 13,573 12,375
-------------- -------------
Operating income 822 996
Other income (expense):
Interest income 44 44
Interest expense (146) (186)
-------------- -------------
Total other income (expense) (102) (142)
Income before income taxes 720 854
Provision for income taxes:
Current 4 3
Deferred 278 322
-------------- -------------
Total income taxes 282 325
-------------- -------------
Net income $ 438 $ 529
============== =============
Net income per common and common equivalent share $ .10 $ .13
============== =============
Weighted average common and common equivalent shares 4,356,000 4,140,000
============== =============
</TABLE>
4
<PAGE>
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months Ended
September 30,
---------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 438 $ 529
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 636 634
Amortization 1,090 945
Provision for deferred income tax 278 322
Changes in operating assets and liabilities:
Accounts receivable 1,063 (1,596)
Unbilled receivables (806) 392
Other assets (339) (497)
Accounts payable (498) (449)
Accrued expenses (640) (736)
Unearned revenues 529 491
------------ ------------
Net cash provided by operating activities 1,751 35
Cash flows from investing activities:
Acquisition of assets, net of cash acquired (139) --
Property and equipment (615) (726)
Capitalized software (1,488) (1,175)
------------ ------------
Net cash used in investing activities (2,242) (1,901)
Cash flows from financing activities:
Principal payments on notes payable (342) (186)
Principal payments on capital leases (273) (274)
Issuance of common shares 277 --
------------- ------------
Net cash used in financing activities (338) (460)
------------- ------------
Decrease in cash (829) (2,326)
Cash and cash equivalents at beginning of period 3,347 3,348
------------- ------------
Cash and cash equivalents at end of period $ 2,518 $ 1,022
============= ============
Supplemental disclosures:
Interest paid $ 146 $ 186
Income taxes paid 7 7
Equipment acquired under capital lease 0 230
</TABLE>
5
<PAGE>
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited consolidated financial statements herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. The accompanying interim financial statements have
been prepared under the presumption that users of the interim financial
information have either read or have access to the audited financial
statements for the latest fiscal year ended June 30, 1996. Accordingly,
footnote disclosures which would substantially duplicate the disclosures
contained in the June 30, 1996 audited financial statements have been
omitted from these interim financial statements. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These interim
financial statements should be read in conjunction with the annual
financial statements and the notes thereto.
Certain items in the September 30, 1995 financial statements have been
reclassified to conform to the September 30, 1996 presentation.
2. Computer software and database development costs
<TABLE>
<CAPTION>
September 30,
1996 June 30,
(Unaudited) 1996
--------------- ---------------
(in thousands)
<S> <C> <C>
Computer software and database development costs consist if the following:
Computer Software (AutoPILOTTM)
Cost $ 10,924 $ 10,347
Less accumulated amortization 4,698 4,307
----------- ----------
Net book value 6,226 6,040
Claim Administration Software
Cost 6,936 6,705
Less accumulated amortization 2,353 2,178
----------- ----------
Net book value 4,583 4,527
Guidelines, Protocols and Medical Analysis Software
Cost 10,576 9,896
Less accumulated amortization 3,696 3,331
----------- ----------
Net book value 6,880 6,565
----------- ----------
Computer Software and Database Development Costs $ 17,689 $ 17,132
=========== ===========
</TABLE>
Amortization of these costs was as follows for the three month period ended
September 30, 1996 and the year ended June 30, 1996:
<TABLE>
<CAPTION>
Three months Ended
September 30, 1996 Year Ended
(Unaudited) June 30, 1996
------------------ ----------------
(in thousands)
<S> <C> <C>
Computer Software (AutoPILOT) $ 391 $ 1,485
Claim Administration Software 175 645
Guidelines, Protocols and Medical Analysis Software 365 1,279
------------------ ---------------
Amortization Expense $ 931 $ 3,409
================== ===============
</TABLE>
6
<PAGE>
3. Merger Agreement
On September 12, 1996, HRM signed a merger agreement with HealthPlan
Services Corporation (HPS) whereby HPS would acquire HRM for consideration
consisting of cash and shares of HPS stock. Under terms of the merger
agreement, each share of HRM stock will be exchanged for $9.68603 in cash
plus 0.360208 of a share of HPS stock. The 0.360208 share exchange ratio is
subject to possible increase or decrease, depending on the market price of
HPS stock during the five trading days preceding consummation of the
merger. The merger is subject to regulatory approval, as well as HRM
shareholder approval, and is expected to close in early 1997.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
A majority of the Company's revenues consist of fees for services provided under
contracts obligating clients to pay a fixed monthly charge for each covered
employee or member based on anticipated case volume experience, a percentage of
savings, a transaction or case fee, or on an hourly basis. In addition, each new
client is typically charged a one-time set-up fee to cover the related set-up
costs incurred by the Company. Such revenue is recognized as services are
rendered under each contract.
The Company's expenses are comprised of its cost of services (consisting
primarily of compensation of personnel, including nurses and physicians,
telephone expenses, rent, costs related to the Company's computer operations,
costs related to customer service, and costs related to development of new
services), selling and marketing expenses (including sales commissions,
advertising, and account management personnel), general and administration
expenses (including bad debts and compensation of personnel in the corporate,
finance, human resources, and general administration departments) and
depreciation and amortization (primarily capitalized leased equipment and
software costs).
Certain items in the financial statements ending September 30, 1995 have been
reclassified to conform to the presentation for September 30, 1996 financials.
Results of Operations
The following table sets forth certain consolidated financial data as a
percentage of total revenue for the three months ended September 30, 1996 and
1995 and the fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
Year
Three months Ended Ended
September 30, June 30,
------------------
1996 1995 1996
------ ------ ------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
===== ===== =====
Operating expenses:
Cost of services 60.1% 58.9% 58.3%
Depreciation and amortization, principally cost of services 12.0% 11.8% 12.7%
Selling and marketing 13.2% 11.7% 12.4%
Administration 9.0% 10.2% 9.6%
----- ----- -----
Total operating expenses: 94.3% 92.6% 93.0%
----- ----- -----
Income from operations 5.7% 7.4% 7.0%
Other income (expense):
Interest income 0.3% 0.3% 0.3%
Interest expense (1.0)% (1.3)% (1.3)%
----- ----- -----
Total other income (expense) (0.7)% (1.0)% (1.0)%
Income before taxes 5.0% 6.4% 6.0%
Income taxes (2.0)% (2.4)% (2.3)%
----- ----- -----
Net income 3.0% 4.0% 3.7%
===== ===== =====
</TABLE>
Revenues: Revenues for the three months ended September 30, 1996 increased
$1,024,000 (8%) over the corresponding period of the prior year (from
$13,371,000 to $14,395,000). This increase is primarily attributable to net
increases in the number of clients and covered participants enrolled in the
Company's healthcare management services, sales of additional services to
existing clients, and increased sales of the QualityFIRST healthcare practice
guidelines.
8
<PAGE>
Following is the approximate breakout of revenue by class of similar service
categories:
<TABLE>
<CAPTION>
Three Months Ended
September 30, Change
-------------------------------- ------------------------------
1996 1995 Amount %
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Care review and case management $ 5,761,000 $ 5,870,000 $ (109,000) (2)%
Price control 1,116,000 976,000 140,000 14%
Claim administration services 5,730,000 5,511,000 219,000 4%
Information management 1,788,000 1,014,000 774,000 76%
-------------- -------------- ------------ ------------
$14,395,000 $ 13,371,000 $1,024,000 8%
============== ============== ============ ============
</TABLE>
There are variations in revenue by class because clients purchasing services may
choose all or a portion of these services, and this varies from client to client
and period to period.
Revenues for care review and case management services decreased 2%, or $109,000,
from the first quarter of fiscal 1996 to fiscal 1997 (from $5,870,000 to
$5,761,000). The decrease in fiscal 1997 was mainly the result of lower revenues
in the HMO unit.
Revenues for price control services increased 14%, or $140,000, from the first
quarter of fiscal 1996 to fiscal 1997 (from $976,000 to $1,116,000). The
increase in fiscal 1997 was mainly the result of an increase in the CarePASS
customer base.
Claim administration services revenues increased 4%, or $219,000, from the first
quarter of fiscal 1996 to fiscal 1997 (from $5,511,000 to $5,730,000) because of
positive customer response to HRM's comprehensive service offering.
Information management revenues increased 76%, or $774,000, from the first
quarter of fiscal 1996 to fiscal 1997 (from $1,014,000 to $1,788,000). In fiscal
1994, fiscal 1995, fiscal 1996, the first quarter of fiscal 1996, and the first
quarter of fiscal 1997, revenues of $1,363,000, $2,628,000, $4,910,000,
$938,000, and $1,756,000, respectively, were related to QualityFIRST(R) software
and system licensing.
Cost of Services: Cost of services increased 10% from the first quarter of
fiscal 1996 to fiscal 1997 (from $7,880,000 to $8,648,000). As a percentage of
revenues, cost of services increased from 59% in fiscal 1996 to 60% in fiscal
1997 because the Company carried excess staff for a portion of the quarter
because of a large HMO's start-up services in August 1996.
Depreciation and Amortization: Depreciation and amortization expenses increased
9% from the first quarter of fiscal 1996 to fiscal 1997 (from $1,579,000 to
$1,726,000), but remained unchanged as a percentage of revenues at 12%. The
increase was primarily the result of depreciation on additional computer,
telephone and office equipment, and amortization of additional software and
contract costs. Approximately 92% of depreciation and amortization expense is
related to cost of services.
Selling and Marketing: Selling and marketing expenses increased 22% from the
first quarter of fiscal 1996 to fiscal 1997 (from $1,558,000 to $1,908,000). The
increase in fiscal 1997 was due primarily to increased marketing, sales and
account management personnel, sales commissions and travel expenses. Selling and
marketing expenses as a percentage of revenues increased to 13% in the first
quarter of fiscal 1997 from 12% in the first quarter of fiscal 1996.
Administration: Administration expenses decreased 5% from the first quarter of
fiscal 1996 to fiscal 1997 (from $1,358,000 to $1,291,000), and decreased as a
percentage of revenues from 10% to 9%. The decrease in administration expenses
in the first quarter of fiscal 1997 was due to lower expense for staff, and
other expenses, including salaries, bad debts, training programs and insurance.
9
<PAGE>
Interest: Interest income was $44,000 for the first quarter of fiscal 1997 and
fiscal 1996, respectively. The income resulted from available funds invested in
short-term investments. Interest expense decreased 22% from the first quarter of
fiscal 1996 to fiscal 1997 (from $186,000 to $146,000, respectively) and
decreased as a percentage of revenues from 1.3% to 1.0%.
Income Taxes: Income taxes decreased in the first quarter of fiscal 1997 from
fiscal 1996 by $43,000. It is expected that the fiscal year 1997 effective tax
rate will approximate the 39% rate of fiscal 1996.
Liquidity and Capital Resources
The Company's cash flow from operations was $35,000 and $1,751,000 for the first
three months of fiscal 1996 and 1997, respectively. Cash flow from operating
activities was greater than net income because non-cash charges such as
depreciation and amortization exceeded the net changes in operating assets and
liabilities for the first three months of fiscal 1997. In the first three months
of fiscal 1996, cash flow for operating activities was less than net income
because changes in operating assets and liabilities exceeded the cash flow
created by net income, depreciation, amortization and deferred income taxes.
Cash has been used to invest in software and program enhancements ($1,175,000
and $1,488,000 in the first three months of fiscal 1996 and fiscal 1997,
respectively). In addition, the Company acquired property and equipment,
including acquired assets, of $726,000 and $754,000 for the first three months
of fiscal 1996 and 1997, respectively. The Company expects to continue its
expansion and will acquire property and equipment, enhance software and
products, and develop products.
The Company has a net operating loss carryforward for income tax purposes in
excess of $13,000,000 as of June 30, 1996, which can be used to reduce the cash
flow necessary to pay taxes.
The Company's cash position at September 30, 1996 was $2,518,000 as compared to
$3,347,000 at June 30, 1996. The Company also used approximately $460,000 and
$615,000 for the first three months of fiscal 1996 and 1997, respectively, to
repay principal on notes payable and capital leases, net of proceeds. The
Company received $277,000 during the first quarter of fiscal 1997 from stock
option exercises for common stock by current employees. The Company's current
ratio was approximately 1.6 at September 30, 1996 and June 30, 1996. The
Company's working capital was $5,472,000 and $5,246,000 at September 30, 1996
and June 30, 1996, respectively.
The Company believes that its cash and cash flow from operations, together with
credit facilities which the Company has obtained, will be sufficient to finance
the Company's anticipated, normal expansion in fiscal 1997. The Company has a
term loan (principal balance of $1,441,000 as of September 30, 1996) with its
bank due June 30, 1999 and a revolving credit facility expiring January 31, 1997
under which the Company may borrow up to $2,500,000. The Company borrowed
$1,500,000 (principal balance of $1,275,000 as of September 30, 1996) under the
$2,500,000 revolving credit facility during fiscal 1996. The revolving credit
and term loan are secured by liens on the assets of the Company.
10
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 -- Computation of Earnings Per Common Share
Exhibit 27 -- Financial Data Schedule
(filed in electronic format only)
(b) During the three months ended September 30, 1996, there was
no report filed on Form 8-K.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Health Risk Management, Inc.
Dated: November 6, 1996 By /s/ GARY T. McILROY, M.D.
Gary T. McIlroy, M.D.
Chief Executive Officer
Dated: November 6, 1996 By /s/ THOMAS P. CLARK
Thomas P. Clark
Chief Financial Officer
12
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX
to
FORM 10-Q
For Quarter Ended September 30, 1996
HEALTH RISK MANAGEMENT, INC.
(SEC File No. 0-18902)
Exhibit
Number Exhibit Description
11 Computation of Earnings Per Share
27 Financial Data Schedule (filed in electronic format only)
13
EXHIBIT 11
HEALTH RISK MANAGEMENT, INC.
COMPUTATION OF EARNINGS PER SHARE (EPS)
(Unaudited)
<TABLE>
<CAPTION>
Primary EPS Fully Diluted EPS
----------------------- -----------------------
Three Months Three Months
Ended Ended
September 30, September 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings (in thousands):
Earnings for period indicated $ 438 $ 529 $ 438 $ 529
========== ========== ========== ==========
Number of Shares:
Weighted average number of shares
of common stock outstanding 4,183,112 4,029,699 4,183,112 4,029,699
Weighted average number of shares
of common stock equivalents 172,498 110,320 229,593 110,711
---------- ---------- ---------- ----------
Number of shares included in per
share computation for the period
indicated 4,355,610 4,140,019 4,412,705 4,140,410
========== ========== ========== ==========
Net earnings per share $ .10 $ .13 $ .10 $ .13
========== ========== ========== ==========
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Financial Statements from the Registrant's Form 10-Q for the quarter
ended 9/30/96 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 2,518
<SECURITIES> 0
<RECEIVABLES> 9,553
<ALLOWANCES> 210
<INVENTORY> 0
<CURRENT-ASSETS> 13,970
<PP&E> 26,382
<DEPRECIATION> 19,873
<TOTAL-ASSETS> 43,619
<CURRENT-LIABILITIES> 8,498
<BONDS> 3,362
0
0
<COMMON> 42
<OTHER-SE> 29,147
<TOTAL-LIABILITY-AND-EQUITY> 43,619
<SALES> 14,395
<TOTAL-REVENUES> 14,395
<CGS> 8,648
<TOTAL-COSTS> 8,648
<OTHER-EXPENSES> 4,925
<LOSS-PROVISION> 31
<INTEREST-EXPENSE> 146
<INCOME-PRETAX> 720
<INCOME-TAX> 282
<INCOME-CONTINUING> 438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 438
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
